Low Fees are Important But Consider Other Factors When Picking ETFs

Exchange traded fund providers have been caught up in a “race to the bottom,” cutting expense ratios to compete and attract market share. While this is generally a positive for investors, there are other reasons that can attract assets into ETFs.

“In reality, most index ETFs from major ETF providers are already cheap. I highly doubt that I would move any money from an existing ETF position due to these expense reductions,” Roger Wohlner for US News wrote. [The Shifting ETF Landscape]

Most major providers have slashed their fees; Charles Schwab lowered the expense ratios for all its ETFs. Vanguard, known for its low fees, further reduced some expense ratios and BlackRock is planning to lower fees in the near future. While this price war is good for investors, is it enough to make them move from an existing ETF position? [ETF Providers- Go Big or Go Home?]

The quality and history of the underlying index is a good place to start. Investors should also consider liquidity, spreads, tracking error and tax efficiency.

According to Chuck Jaffe in a recent MarketWatch article, a Vanguard report found that 1,400 U.S. listed ETFs track more than 1,000 different indexes. But more than half of these benchmarks had existed for less than six months before an ETF came along to track it. [Schwab Takes the Lead in the ETF Price War]

“Many of these new ETFs rely on the hypothetical back testing of these new indexes. While history is not always a good predictor of future performance, I do like to see an ETF with an underlying index that has been ‘battle tested’ in the real world,” Wohlner said.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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